As filed with the Securities and Exchange Commission on May 12, 2021

Registration No. 333–249659

 

  

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

 

AMENDMENT NO. 7

TO

 

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

Lianluo Smart Limited

(Exact name of registrant as specified in its charter)

 

British Virgin Islands   3841   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Room 1003B, 10th Floor, Beikong Technology Building

No. 10 Baifuquan Road, Changping District

Beijing 102200, People’s Republic of China

Telephone: +86-10-89788107

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

Tel: 800-221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With a Copy to:

 

Kevin (Qixiang) Sun, Esq.
Bevilacqua PLLC
1050 Connecticut Avenue, Suite 500
Washington, DC 20036
(202) 868-0888 (ext. 101)

Joan Wu, Esq.

Louis Taubman, Esq.

Hunter Taubman Fischer & Li LLC

800 Third Avenue, Suite 2800

New York, NY 10022

(212) 530-2208

Barry I. Grossman, Esq. 

Sarah E. Williams, Esq.

Jessica Yuan, Esq.

Ellenoff Grossman & Schole LLP

1345 6th Ave

New York, NY 10105

(212) 370-1300

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.
   
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering
   
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering
   
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933  
   
Emerging growth company
   
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered   Proposed Maximum
Aggregate Offering
Price(1)
    Amount of
Registration
Fee(4)
 
Common Shares, par value $0.021848 per share (2)(3)   $ 34,500,000     $ 3,763.95  
Total   $ 34,500,000     $ 3,763.95  

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act.  

 

(2) In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional Common Shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
   
(3) Includes Common Shares that are issuable upon the exercise of the underwriter’s over-allotment option.
   
(4) Paid previously.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

As submitted to the Securities and Exchange Commission on May 12, 2021

 

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS DATED [●], 2021

 

2,729,755 Common Shares

 

Lianluo Smart Limited/Newegg Commerce, Inc.

 

This prospectus relates to a public offering (the “Offering”) of 2,729,755 Common Shares of Lianluo Smart Limited (which will be changed to Newegg Commerce, Inc. upon completion of this Offering), in connection with simultaneous restructure transactions consisting of a proposed merger, which is a business combination under common control (the “Merger”) and a proposed disposition (the “Disposition”, together with the Merger, the “Restructure”).

 

Pursuant to the terms of the Merger, our wholly owned subsidiary, Lightning Delaware Sub, Inc., a Delaware company (the “Merger Sub”) will merge into Newegg Inc. (“Newegg”), a company incorporated under the laws of Delaware. Upon consummation of the Merger, Newegg will be the surviving entity and our wholly owned subsidiary. At the same time, pursuant to the terms of Disposition, we will sell all of the business, assets and liabilities of our wholly owned subsidiary, Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd. (“Lianluo Connection”), a PRC company, to Beijing Fenjin Times Technology Development Co., Ltd. (“Fenjin Times”).

 

The closing of the Restructure and this Offering is contingent on the closing of each other transaction. In connection with the Restructure and the Offering, we will amend our Memorandum and Articles of Associations to reflect, among other things, the share redesignation, the share combination, the share increase, certain rights of certain of our principal shareholders, and the name change upon the consummation of this Offering and Restructure (the Memorandum and Articles of Associations as amended, “Fifth Amended and Restated Memorandum and Articles of Association”).

 

We intend to offer our Common Shares to the public in this Offering at a fixed price of $[  ]. The final public offering price will be determined through negotiation between us and the underwriter in this Offering and will take into account the recent market price of our Class A common shares, the general condition of the securities market at the time of this Offering, the history of, and the prospects for, the industry in which we compete, and our past and present operations and our prospects for future revenues. The recent market price used throughout this prospectus may not be indicative of the public offering price per share. The price of our Class A Common Shares has been subject to significant volatility during the last year, ranging in price from a low of $2.80 on September 24, 2020 to a high of $17.14 on January 28, 2021, as reported on the Nasdaq Capital Market. The closing price of the Class A common Share on April 30, 2021 was $10.99.

 

In addition, upon closing of the Restructure and immediately prior to the Offering, 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 96.90%, collectively, based on the number of our Class A Common Shares and Newegg stock outstanding as of May 3, 2021. Mr. Zhitao He and Mr. Fred Chang, both of whom will both 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 interest with the minority shareholders. Where such a conflict exists, 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.

 

Moreover, substantially all of Mr. He’s shares are pledged as collateral to Bank of China (“BOC”) to support working capital loans and letters of credit provided by BOC to Hangzhou Lianluo. 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 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. BOC could sell, or force Mr. He to sell, some or all of his shares of Newegg and the Company at any time while the BOC loan remains delinquent. Mr. He could also choose to voluntarily sell some or all of his shares at any time to satisfy the BOC loan. See additional disclosures relating to the shares held by Mr. He under “Risk Factors — A majority of Newegg’s capital shares are, and upon completion of the merger, 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.”

 

 

 

 

Upon the completion of the Restructure and this Offering, we will continue to be a “controlled company” as defined under the NASDAQ Listing Rules because Mr. Zhitao He, the chairman of the board of directors of the post-closing issuer, will beneficially own approximately 224,394,452 Common Shares and will be able to exercise approximately 60.50% of our total voting power, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, which was the closing price of our Class A Common Shares on Nasdaq on April 30, 2021. 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.

 

Upon the completion of the Restructure and this Offering, we will also continue to be a “foreign private issuer” as defined under rule 3b-4(c) of the Exchange Act. 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.

 

Furthermore, upon the completion of the Restructure and this Offering, the board of the post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital Grid (Hong Kong) Technology Co., Limited, which will beneficially own approximately 60.07% of our total voting power upon completion of this Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, and three of the directors shall be appointed by a “Minority Representative” which is selected by a majority of Newegg’s stockholders other than Digital Grid (the “Legacy Shareholders”). The Legacy Shareholders will collectively own approximately 37.88% of our total voting power upon completion of this Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering. The initial Minority Representative is Mr. Fred Chang. 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 pursuant to our Fifth Amended and Restated Memorandum and Articles of Association. Any director positions which neither Digital Grid nor the Legacy Shareholders 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 any director to our board.

 

On October 21, 2020, we filed the Fourth Amended and Restated Memorandum and Articles of Association (the “Fourth Amended and Restated Memorandum and Articles of Association”) to effectuate an one-for-eight reverse stock split of its authorized share capital, effective on October 21, 2020. Pursuant to the Fourth Amended and Restated Memorandum and Articles of Association, we are authorized to issue 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 $0.002731 each, and 1,513,889 be designated as Class B Common Shares of par value of $0.021848 each. In this registration statement, unless explicitly stated, such one-for-eight reverse stock split has been reflected in the shares numbers.

 

Our Class A Common Shares are listed on the Nasdaq Capital Market under the symbol “LLIT”. We are applying to change our symbol of our Common Shares to “NEGG”, effective upon the closing of this Offering. On April 30, 2021, the closing price of our Class A Common Shares was $10.99 per share.

 

Investing in our Common Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying our Common Shares.

 

    Per Share   Total  
Public offering price   $   $           
Underwriter discount   $   $  
Proceeds to the Company   $   $  

 

(1) See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriters.

 

(2) The total estimated expenses related to this Offering are set forth in the section entitled “Discounts, Commissions and Expenses.”

 

The underwriters are selling our Common Shares in this Offering on a firm commitment basis.

 

We do not intend to close this Offering unless the Restructure closes and the Common Shares are qualified for listing on NASDAQ.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Sole Book-Running Manager

 

Maxim Group LLC

 

The date of this prospectus is May [●], 2021.

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
SUMMARY FINANCIAL DATA 12
   
RISK FACTORS 13
   
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 43
   
INDUSTRY 44
   
ENFORCEABILITY OF CIVIL LIABILITY 46
   
USE OF PROCEEDS 47
   
DIVIDEND POLICY 47
   
CAPITALIZATION 48
   
DILUTION 48
   
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 49
   
BUSINESS 69
   
MANAGEMENT 92
   
EXECUTIVE COMPENSATION 98
   
PRINCIPAL SHAREHOLDERS 100
   
RELATED PARTY TRANSACTIONS 105
   
DESCRIPTION OF SHARE CAPITAL 107
   
TAXATION 122
   
UNDERWRITING 126
   
EXPENSES RELATING TO THIS OFFERING 137
   
LEGAL MATTERS 137
   
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 137
   
EXPERTS 137
   
INTEREST OF NAMED EXPERTS AND COUNSEL 138
   
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION 138
   
WHERE YOU CAN FIND MORE INFORMATION 138
   
INDEX TO FINANCIAL STATEMENTS F-1

 

i

 

  

About this Prospectus

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Common Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. For the avoidance of doubt, no offer or invitation to subscribe for Common Shares is made to the public in the British Virgin Islands. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Other Pertinent Information

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

  “Beijing Dehaier” or “BDL” are to Beijing Dehaier Medical Technology Company Limited, a PRC company;
     
  “BTL” are to Beijing Dehaier Technology Company Limited, a PRC company;
     
  “BVI” are to the British Virgin Islands;
     
  “Class A Common Shares” are to the Company’s Class A Common Shares, par value $0.021848 per share;
     
  “Class B Common Shares” are to the Company’s Class B Common Shares, par value $0.021848 per share;

 

  “Class A Common Stock” are to Newegg’s Class A Common Stock, par value $0.001 per share;
     
  “Class B Common Stock” are to Newegg’s Class B Common Stock, par value $0.001 per share;

 

  “Common Shares” are to the post-closing issuer’s Common Shares, par value $0.021848 per share;
     
  “Companies Act” are to the BVI Business Companies Act, 2004;
     
  “Digital Grid” are to Digital Grid (Hong Kong) Technology Co., Limited, a fully owned subsidiary of Hangzhou Lianluo

 

  “Exchange Act” are to the U.S. Securities Exchange Act of 1934, as amended;

 

  “Hangzhou Lianluo” are to Hangzhou Liaison Interactive Information Technology Co., Ltd., a company organized under the laws of PRC;
     
  “Hong Kong” or “H.K.” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
     
  “Lianluo Smart”, “LLIT,” “we,” “us,” “our” and the “Company” are to Lianluo Smart Limited, a BVI company;
     
  “Lianluo Connection” or “LCL” are to Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd., a PRC company;
     
  “Lianluo Technology” are to Hangzhou Lianluo Technology Co., Ltd., a wholly owned PRC subsidiary of LLIT.

 

ii

 

 

  “Merger Sub” are to Lightning Delaware Sub, Inc., a company organized under the laws of Delaware and a wholly owned subsidiary of LLIT;
     
  “Newegg” are to Newegg Inc., a company organized under the laws of Delaware;

 

  “Newegg Shares” are to the issued and outstanding shares of Newegg, including its Class A Common Stock, Class B Common Stock, Series A Preferred Stock and Series AA Preferred Stock;

 

 

“Offering” are to the sale of 2,729,755 Common Shares (or 3,139,218 Common Shares if the underwriter exercise its over-allotment option in full);

     
  “PRC” and “China” are to the People’s Republic of China;
     
  “Renminbi” and “RMB” are to the legal currency of China;

 

  “Sarbanes-Oxley Act” are to the Sarbanes-Oxley Act of 2002;

 

  “Securities and Exchange Commission,” “SEC,” “Commission” or similar terms are to the United States Securities and Exchange Commission;
     
  “Securities Act” are to the U.S. Securities Act of 1933, as amended;

 

  “Series A Preferred Stock” are to Newegg’s Series A Preferred Stock, par value $0.001 per share;
     
  “Series AA Preferred Stock” are to Newegg’s Series AA Preferred Stock, par value $0.001 per share;

 

  “United States,” “U.S.” and “US” are to the United States of America;
     
  “$,” “U.S. $,” “U.S. dollars,” “dollars,” and “USD” are to United States dollars.

 

iii

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. A forward-looking statement is a projection about a future event or result, and whether the statement comes true is subject to many risks and uncertainties. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. The actual results or activities of the Company will likely differ from projected results or activities of the Company as described in this prospectus, and such differences could be material. 

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results and performance of the Company to be different from any future results, performance and achievements expressed or implied by these statements. In other words, our performance might be quite different from what the forward-looking statements imply. You should review carefully all information included in this prospectus.

 

You should rely only on the forward-looking statements that reflect management’s view as of the date of this prospectus. We undertake no obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances. You should also carefully review the risk factors described in other documents we file from time to time with the SEC. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with the “safe harbor,” we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors.”

 

iv

 

 

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 share 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 5.8417 Exchange Shares based on the LLIT Conversion Ratio. The “LLIT Conversion Ratio” shall be 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 Mr. Zhitao He, Hangzhou Lianluo and Hyperfinite Galaxy Holding Limited, agreed to enter into a certain support agreement with LLIT and Newegg to vote in LLIT’s special shareholder meeting all their shares of LLIT, which represents 80.4% of the total voting power as of the record date for the shareholder meeting, 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. Mr. Ping Chen, who holds 201,692 outstanding Class A Common Shares, which represent approximately 5.9% of the outstanding voting power which is not controlled by Hangzhou Lianluo as of the record date for the shareholder meeting, also agreed to enter into a substantially similar support agreement with LLIT and Newegg. Mr. Ping Chen also holds options exercisable for an additional 65,733 Class A Common Shares at exercise prices ranging from $11.60 to $42.48 per share.

 

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.

 

1

 

 

Prior to the Merger, Hangzhou Lianluo, through its wholly owned subsidiary Digital Grid (Hong Kong) Technology Co., Ltd. (“Digital Grid”), owns 60.91% 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, Lianluo Connection on August 13, 2020 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. (“Fenjin Times”). 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 Fenjin Times for cash consideration of $0. Fenjin Times also agreed to make contributions 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 it in an aggregate amount of $11,255,188 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 will 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 May 3, 2021. Based on the number of our Common Shares and Newegg stock outstanding as of such date, immediately following the completion of the Merger, our shareholders immediately prior to the Merger are expected to own approximately 1.31% of our outstanding Common Shares and former Newegg stockholders are expected to own approximately 98.69% of our outstanding Common Shares.

 

In addition, Mr. Zhitao He and Mr. Fred Chang will own approximately 60.50%% and 35.72%, respectively, of the voting power of our issued and outstanding Common Shares, and 96.22%, collectively, based on the number of our Common Shares and Newegg stock outstanding as of May 3, 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 interest with the minority shareholders. Where such a conflict exists, 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.

 

2

 

 

See additional disclosures relating to the shares held by Mr. He under “Risk Factors – A majority of Newegg’s capital shares are, and upon completion of the Merger, 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

  

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”) platform, business-to-business (“B2B”) operations, and other online platforms, it operates both direct sales and Marketplace models (the “Marketplace”) 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.

  

  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 seller 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.

 

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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.

 

  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 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, the majority of whom are tech-savvy, and its ancillary e-commerce solutions. This will enable it 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.

 

  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.

 

  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.

 

  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.

 

  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 a 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. Although the Company’s current share price exceeds $4.00, its share price has fluctuated significantly in recent months and has at times been below $4.00, and so the share combination may be necessary to meet the minimum bid price listing requirement. The board of directors of the Company recommends the shareholders 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 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. 

 

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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 Shareholders”, collectively with Digital Grid “Principal Shareholders”) with the rights to appoint a 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 Mr. 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 the 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 Common 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) more than fifty percent (50%) 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 remove four directors, (ii) less than or equal to fifty percent (50%) and more than two sevenths (2/7) 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 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(ii) 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 Mr. Fred Chang.

 

Any director positions which neither Digital Grid nor the Minority Representative is 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 Interests 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. These actions include, but are not limited to, (i) initiating any liquidation, dissolution, bankruptcy filing or similar action, recapitalization, share combination or division, restructuring or reorganization, (ii) 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, (iii) entering into any related-party transactions, and (iv) appointing or removing the chief executive officer of the post-closing issuer.

 

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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 the 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 the post-closing issuer, will beneficially approximately own 224,394,452 of our Common Shares and will be able to exercise approximately 60.50% of our total voting power, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, which was the closing price of our Class A Common Shares on Nasdaq on April 30, 2021. 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 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.”

 

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  The proposed Restructure is subject to a number of conditions.

 

  Upon consummation of the Merger, Mr. Zhitao He and Mr. Fred Chang will beneficially own approximately 60.50% and 35.72%, respectively, of the voting power of our issued and outstanding Common Shares, and 96.22%, 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.

 

  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 directors 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.

 

  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.

 

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  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.

 

  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, result in 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 such as quarterly reporting, current reports, and certain compensation disclosure requirements.

  

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THE OFFERING

 

Common Shares offered by us  

2,729,755 Common Shares (or 3,139,218 Common Shares if the underwriter exercises its over-allotment option in full) at an assumed offering price of $10.99 per Common Share in the Offering, which was the closing price of our Class A Common Shares on Nasdaq on April 30, 2021. 

     
Price per Common Share  

We intend to offer our Common Shares to the public in this Offering at a fixed price of $[  ]. The final offering price will be determined through negotiation between us and the underwriter in this Offering and will take into account the recent market price of our Class A common shares, the general condition of the securities market at the time of this Offering, the history of, and the prospects for, the industry in which we compete, and our past and present operations and our prospects for future revenues.

     
Over-allotment  

We have granted the underwriters an option for a period of up to 45 days to purchase up to 15% of the total number of Common Shares offered to the public at public offering price, less the underwriting discounts and commissions.

     
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)   4,854,571 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)  

370,909,868 Common Shares (or 371,319,331 Common Shares if the underwriter exercises its over-allotment option in full)

     
Listing   Our Class A Common Shares currently trade on the NASDAQ under the symbol “LLIT” and we have applied to change the trading symbol to be “NEGG” upon closing of this Offering.
     
Use of proceeds  

We expect that we will receive net proceeds of approximately $25.8 million from this Offering, or approximately $30.0 million if the underwriter exercises its over-allotment option in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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 5% 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 180 days after this Offering is completed without the prior written consent of the underwriters.  In addition, certain stockholders of Newegg are subject to substantially similar lockup restrictions for a period of 180 days after this Offering is completed, which restrictions can be waived with the prior written consent of the underwriters and Newegg.  All shares that are subject to stock option awards issued under Newegg’s 2005 Incentive Award Plan and restricted stock issued under a Significant Shareholder Incentive Program will also be subject to substantially similar lockup restrictions for a period of 180 days after this Offering is completed, which restrictions can be waived with the prior written consent of the underwriters and Newegg.

   

Except as otherwise noted, all information in this prospectus reflects and assumes no exercise of the underwriter’s over-allotment option. 

 

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Summary Financial Data 

 

The following summary financial data for the year ended December 31, 2020 are derived from our unaudited pro forma combined financial statements included elsewhere in this registration statement. Our historical results for the year ended December 31, 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.

 

For the Year Ended December 31, 2020
(In thousands) (Unaudited)
                         
    Newegg     Company     Pro Forma Adjustments     Pro Forma Combined  
Net sales   $ 2,114,872     $ 359     $ (359 )   $ 2,114,872  
Cost of sales     1,841,243       647       (647 )     1,841,243  
Gross profit (loss)     273,629       (288 )     288       273,629  
Selling, general, and administrative expenses     250,239       2,687       (1,037 )     251,889  
Income (loss) from operations     23,390       (2,975 )     1,325       21,740  
Interest income     1,124       1       (1 )     1,124  
Interest expense     (664 )     -       -       (664 )
Other income (expense), net     5,320       (23 )     22       5,319  
Unrealized loss on securities     -       130       -       130  
Change in fair value of warrants liabilities     -       (129 )     -       (129 )
Gain from sale of and equity income from equity method investments     3,197       -       -       3,197  
Loss on disposal of a subsidiary     -       (245 )     -       (245 )
Income (loss) before provision for income taxes     32,367       (3,241 )     1,346       30,472  
Provision for income taxes     1,941       -       -       1,941  
Net income (loss)   $ 30,426     $ (3,241 )   $ 1,346     $ 28,531  

 

December 31, 2020

(In thousands) (Unaudited)

 

    Newegg     Company     Pro Forma Adjustments     Pro Forma Combined  
Cash and cash equivalents   $ 156,635     $ 1,816     $ (10 )   $ 158,441  
Other assets     400,833       4,232       (440 )     404,625  
Total assets     557,468       6,048       (450 )     563,066  
Total liabilities     429,971       3,236       (2,453 )     430,754  
Total temporary equity     187,801       -       (187,801 )     -  
Total equity (deficit)   $ (60,304 )   $ 2,812     $ 189,804     $ 132,312  

  

12

 

  

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, 2020, filed on March 31, 2021, you should carefully consider the following risk factors:

 

Risks Relating to the Proposed Restructure

 

The proposed Restructure is subject to a number of conditions.

 

Completion of the proposed Merger is conditioned upon, among other matters, (i) the approval of the Merger proposal and all other proposals included in the proxy statement/prospectus filed on a Form F-4, as amended, by our shareholders, (ii) receipt of all consents from all governmental authorities or third parties, (iii) the absence of any order by any governmental authority which has the effect of making the transactions or agreements contemplated by the Merger Agreement or the Disposition Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by the merger agreement, (iv) the absence of any pending claim, action, suit, proceeding, arbitration, mediation or investigation brought by a third-party non-affiliate to enjoin or otherwise restrict the consummation of the Merger or the Disposition, (v) the registration statement of which the proxy statement/prospectus filed on a Form F-4, as amended, shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order, (vi) the registration statement on Form F-1 relating to a public offering of our Common Shares shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order; (vii) the approval for listing on NASDAQ, subject to official notice of issuance, of the Common Shares to be issued in the Merger, (viii) subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of the parties contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement, (ix) the absence of a material adverse effect with respect to each of the parties thereto, and (x) a public offering of our Common Shares for $30 million, or such other amount necessary to meet NASDAQ’s initial listing requirements shall have simultaneously closed along with the Merger, with the Disposition closing immediately after the Merger.

 

The Disposition Agreement contains the following closing conditions, (i) obtaining any requisite regulatory approvals for the Disposition, (ii) no law or order prohibiting or preventing consummation of the Disposition; (iii) no litigation to enjoin or otherwise restrict consummation of the Disposition; (iv) our shareholders’ approval of the Disposition; (v) the consummation of the Merger with Newegg; and (vi) the conversion of debt that Lianluo Connection owes to us into additional paid-in capital of Lianluo Connection.

 

The required satisfaction (or waiver) of the foregoing conditions could delay the completion of the Merger and the Disposition for a significant period of time or prevent it from occurring. Any delay in completing the Merger or the Disposition could cause us not to realize some or all of the benefits that the parties expect the Company to achieve. Further, there can be no assurance that the conditions to the closing of the Merger or the Disposition will be satisfied or waived or that the Merger will be completed.

 

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 will be further diluted.

 

13

 

 

Certain of our directors, executive officers 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 50.54% of all issued and outstanding shares of Newegg. See additional disclosures relating to the shares held by Mr. He below under the heading “– A majority of Newegg’s capital shares are, and upon completion of the Merger, 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 shareholders. Hangzhou Lianluo has indicated that one of the reasons it would like to complete the Merger is that it believes it is the best way for Newegg to become publicly listed, which will provide it and other Newegg stockholders better liquidity for their Newegg investment. Nevertheless, the interests of our major shareholders and some of our directors and officers in the proposed Restructure may be different from, and may potentially conflict with, our interests and the interests of our unaffiliated shareholders.

 

Upon consummation of the Merger and the Offering, Mr. Zhitao He and Mr. Fred Chang will beneficially own approximately 60.50% and 35.72%, respectively, of the voting power of our issued and outstanding Common Shares, and 96.22%, 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 and the Offering, Mr. Zhitao He and Mr. Fred Chang will own approximately 60.50% and 35.72%, respectively, of the voting power of our issued and outstanding Common Shares, and 96.22%, collectively, based on the number of our Common Shares and Newegg stock outstanding as of May 3, 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 interest with our other shareholders. Where such a conflict exists, 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 Newegg’s capital shares are, and upon completion of the Merger and the Offering, 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 60.52% of our outstanding Common Shares upon closing of the Merger and the Offering, based on our and Newegg’s capitalization on May 3, 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.

 

14

 

 

BOC could sell, or force Digital Grid to sell, some or all of its shares of Newegg and ours at any time while the BOC loan remains delinquent. Digital Grid could also choose to voluntarily sell some or all of its shares at any time to satisfy the BOC loan. Any such sale or attempted sale could:

 

Occur at a discount to our public trading price and over a short time period;
Result in a change of control of us to the buyer of such shares; or
Result in litigation over the ownership and title to those shares.

 

Each of these risks could cause our share price to fall significantly and is described further below.

 

Digital Grid’s Newegg stock certificates are physically in the possession of BOC. As a result, BOC could sell those shares at any time. Any such sale could be done quickly and without regard for maximizing the sale price, other than to enable BOC to recover the amount of indebtedness owed to it by Hangzhou Lianluo. In such a case, the sale price would likely be significantly less than the public trading price of our shares, which would likely cause our share price to fall significantly.

 

In addition, any transfer of those shares to a non-affiliate of Digital Grid would be subject to our amended and restated shareholders agreement. The shareholders agreement gives a right of first refusal in favor of Newegg (or, after the Merger, us), 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.

 

Because Digital Grid will control approximately 60.07% of our outstanding shares after completion of the Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, we expect that it will be the controlling shareholder of us after completion of the Merger. However, any sale of Digital Grid’s shares by BOC or otherwise could result in a change of control of us. For example, if Newegg repurchased 17,669,000 Newegg shares (or 103,216,997 of our shares) from Digital Grid under the right of first refusal, then Mr. Fred Chang would become our controlling shareholder. As another example, if Mr. Chang purchased 8,834,481 Newegg shares (or 51,608,385 of our shares) from Digital Grid under the right of second refusal, then Mr. Chang would become our controlling shareholder. Even if the right of first refusal and second refusal are not exercised, Digital Grid could still sell a controlling interest in the Company, and the buyer would thereafter control the Company. Any such change in control could result in instability to us which could cause our share price to fall.

 

In addition, the shareholders agreement may not be recognized or enforceable in China’s courts, because the agreement is governed by the laws of Delaware currently and the laws of the British Virgin Islands after the merger, and China courts generally do not recognize court decisions from those jurisdictions. As a result, BOC or Digital Grid could try to sell some or all of Digital Grid’s shares without complying with those agreements. Any such sale could result in significant litigation and uncertainty over the ownership of those shares, which could cause our share price to fall.

 

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:

 

  an exemption from the rule that a majority of our Board must be independent directors;

 

  an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

 

  an exemption from the rule that our director nominees must be selected or recommended solely by 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.

 

15

 

 

The Fifth Amended and Restated Memorandum and Articles of Association which provide certain rights to the Principal Shareholders of the post-closing issuer will limit your ability to appoint directors 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 the post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital Grid, which will beneficially own approximately 60.07% of our total voting power upon completion of this Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, and three of the directors shall be initially appointed by Mr. Fred Chang, acting as a “Minority Representative” which is selected by a majority of the Legacy Shareholders, who collectively will own approximately 35.72% of our total voting power upon completion of this Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the 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 is 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 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.

  

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:

 

  we may be required under certain circumstances to pay Newegg a termination fee;
     
  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;
     
  our operations may continue to incur loss;
     
  we may have difficulty maintaining compliance with NASDAQ continued listing rules, and as a result, be delisted from Nasdaq Capital Market; and
     
  costs related to the Restructure, such as legal, accounting, financial advisory and printing fees, must be paid even if the Restructure is not completed.

 

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.

 

16

 

 

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 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.

 

17

 

 

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 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 approximately 363,325,542 Common Shares, which will entitle the holders thereof to one vote 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 98.68%  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.  

 

18

 

 

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: 

 

  limited availability of market quotations for our securities;
     
  limited amount of news coverage for the Company; and
     
  decreased ability to issue additional securities or obtain additional financing in the future.

 

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 a 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 a 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 have 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 Shareholder receives a bona fide offer from any person other than its affiliate to acquire any of the Principal Shareholder’s 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 Shareholders  other than the selling Principal Shareholder 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 Shareholders) bears to the total Percentage Interests of all Principal Shareholders 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.

 

We may be subject to shareholder litigation due to the volatility in the price of the Common Shares, which may result in substantial costs and a diversion of our management’s attention and resources.

 

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.

 

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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 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:

 

  Newegg’s ability to successfully forecast sales and execute its long-term growth strategy during these uncertain times;

 

  the build-up of excess inventory as a result of lower consumer demand;

 

  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;

 

  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;

 

  Newegg’s ability to collect outstanding receivables from its customers;
     
  Newegg’s ability to attend and participate in industry and trade shows; and

 

  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:

 

  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;

 

  diseases or pandemics (including COVID-19) that have affected and may continue to affect the 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;

 

  computer malware, physical or electronic break-ins and similar disruptions;

 

  security breaches and hacking attacks;

 

  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

 

  incidents of fraud.

 

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.

  

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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 has 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.

 

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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.

 

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There could be declines in the sales of the products offered by Newegg and its Marketplace sellers due to several factors, including:

 

  decreased demand for IT or CE products, particularly computer components and parts that have historically generated a significant portion of Newegg’s net sales;

 

  poor economic conditions and any related decline in customers’ demand for the products Newegg and its Marketplace sellers offer;

 

  increased price competition from Newegg’s competitors; or

 

  technological obsolescence of the products that Newegg and its Marketplace sellers offer.

 

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.

 

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Newegg currently operates customer service centers in California and Texas and has customer service representatives working remotely in California, Indiana, Nevada, New Jersey and Texas, 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:

 

  international economic and political conditions;

 

  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;

 

  tax laws, regulations and treaties, including U.S. taxes on foreign operations and repatriation of funds;

 

  difficulties in identifying, attracting, hiring, training and retaining qualified personnel, and overseeing international operations, including the efficient management of its international operations;

 

  delays or additional costs resulting from import/export controls, duties, tariffs or other barriers to trade; and

 

  currency exchange controls or changes in exchange rates, which could make its pricing less competitive or reduce its profit margins.

 

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.

 

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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.

 

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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”) was 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.

 

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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 year ended December 31, 2020, Newegg recorded inventory write-offs or write-downs totaling $4.7 million, or 0.3% 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 higher 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 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.

 

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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 (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.

  

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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 December 31, 2020, its accounts payable balance was approximately $241.5 million with 40 days of payables outstanding. Newegg’s accounts payable balances as of December 31, 2020 represented 54.6% 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.

 

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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.

 

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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.

 

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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, plus 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. U.S. government actions since 2018 have imposed greater restrictions and economic disincentives on international trade impacting imports and exports. The U.S. government has adopted changes, and may 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, and 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 these 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 Newegg 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. A Phase 2 Agreement has not been announced as of the date of this prospectus. Any increase in the cost of importing goods and parts could decrease Newegg’s 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.

 

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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 goods manufactured outside the United States that are produced using certain controlled U.S. technology, or software 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 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.

 

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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 “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 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. NASDAQ has granted approval for us 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 that our Principal Shareholders will own approximately 96.22% of the Company’s outstanding Common Shares after the Offering, assuming we sell 2,729,755 Common Shares at an assumed offering price of $10.99 per Common Share in the Offering, which was the closing price of our Class A Common Shares on Nasdaq on April 30, 2021. 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.

 

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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:

 

  variations in our revenues, operating costs and expenses, earnings, and cash flow;

 

  announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

  announcements about our earnings that are not in line with analysts’ expectations;

 

  announcements of new products and services by us or our competitors;

 

  changes in financial estimates by securities analysts;

  

  detrimental adverse publicity about us, our shareholders, affiliates, directors, officers or employees, our product offerings, our business model, or our industry;

 

  announcements of new regulations, rules or policies relevant for our business;

 

  additions or departures of key personnel;

 

  release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

  potential litigation or regulatory investigations.

 

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, result in 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 our 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 the 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 the 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 announced this investigation on August 7, 2020 and stated that it will fully cooperate with CSRC in the investigation. On October 19, 2020, Hangzhou Lianluo announced that it has received a notice of administrative punishment from the Zhejiang Regulatory Bureau of CSRC, which provides, among other things, 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.

 

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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 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 or in conjunction with mergers and acquisitions such as the Merger and Disposition. 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 $10.67 per Common Share, based on an assumed offering price of $10.99 per Common Share, which was the closing price of Class A Common Shares on Nasdaq on April 30, 2021. Each $0.50 increase (decrease) in the assumed public offering price of $10.99 per Common Share would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by approximately $1.36 million, the pro forma as adjusted net tangible book value per ordinary share and per Common Share after giving effect to this Offering by $0.004 per Common Share, and the dilution in pro forma as adjusted net tangible book value per Common Share to new investors in this offering by $0.004 per Common Share, assuming no change to the number of Common Shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses. 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.

 

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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.

 

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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. 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 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.”

 

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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 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 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. 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.

 

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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:

 

  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;

 

  the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

  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

 

  the rules under Regulation FD governing selective disclosure rules of material nonpublic information.

 

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.”

 

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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:

 

  future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our ability to compete in an industry with low barriers to entry;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  our ability to attract customers,  and further enhance our brand recognition; and
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in the e-commerce industry;
     
  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
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

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.

 

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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 e-commerce market in terms of the revenue,  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 2020 with a peak 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.

 

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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 U.S. 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 for shopping online, supported by 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.

 

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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.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from this Offering will be approximately $25.8 million or approximately $30.0 million 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.

 

Each $0.50 increase or decrease in the assumed offering price of $10.99 per share would increase or decrease our expected net proceeds from the Offering by approximately $1.28 million, assuming the number of Common Shares, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting commissions and estimated offering expenses payable by us. We may also increase or decrease the number of Common Shares we are offering. An increase or decrease of 500,000 Common Shares offered by us would increase or decrease the expected net proceeds to us by approximately $5.17 million, assuming that the assumed offering price remains the same and after deducting estimated underwriting commissions and estimated offering expenses payable by us. The actual net proceeds payable to us will adjust based on the actual number of Common Shares sold by us, the actual offering price and other terms of the Offering determined at pricing. 

 

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:

 

  approximately 30% to enhance and expand our Marketplace seller recruitment and platform services for Marketplace sellers;

 

  approximately 35% to enhance our technological capabilities, including our technology infrastructure;

 

  approximately 25% to expand and improve our fulfillment facilities; and

 

  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.

 

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.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2020:

 

  on an actual basis; and
     
  on a pro forma basis to reflect the Disposition, the Merger, and the issuance of an aggregate 1,255,000 of Class A Common Shares in January 2021 upon exercise of certain outstanding warrants; and
     
  on a pro forma as adjusted basis to reflect the sale of 2,729,755 Common Shares by us in the Offering at an assumed public offering price of $10.99 per Common Share, which was the closing price of the Class A Common Shares.

 

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 December 31, 2020  
    Actual     Pro Forma     Pro Forma As Adjusted  
    (in thousands, except shares and par value)  
Cash and cash equivalents   $ 1,816     $ 165,272     $ 193,372  
                         
Indebtedness                        
Line of credit     -       5,276       5,276  
Long-term debt, including current portion     -       2,369       2,369  
Total indebtedness     -       7,645       7,645  
                         
Equity:                        
Class A Common Share, $0.021848 par value, 4,736,111 shares authorized, 2,210,683 shares issued and outstanding on an actual basis; unlimited shares authorized, 368,180,113 and 370,909,868 shares issued and outstanding on a pro forma basis and an as adjusted basis, respectively.     48       8,044       8,104  
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 0 shares issued and outstanding on an as adjusted basis     30       -       -  
Additional paid-in capital     47,996       193,769       219,510  
Notes receivable     -       (15,186 )     (15,186 )
Accumulated deficit     (47,849 )     (50,542 )     (50,542 )
Accumulated other comprehensive income     2,587       3,057       3,057  
Total shareholders’ equity     2,812       139,142       164,943  
Total capitalization   $ 2,812     $ 146,787     $ 172,588  

 

DILUTION

 

If you invest in our Common Shares, your interest will be diluted for each Common Share 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 Share 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 at an assumed public offering price of $10.99 per Common Share:

 

    As of
December  31,
2020
 
Public Offering price per share   $ 10.99  
Pro forma net tangible book value per share as of December 31, 2020     0.25  
Increase in net tangible book value per share attributable to existing shareholders     0.07  
Pro forma net tangible book value per share after this Offering     0.32  
Dilution per share to new investors   $ 10.67  

 

Each $0.50 increase (decrease) in the assumed public offering price of $10.99 per Common Share would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by approximately $1.36 million, the pro forma as adjusted net tangible book value per ordinary share and per Common Share after giving effect to this Offering by $0.004 per Common Share, and the dilution in pro forma as adjusted net tangible book value per Common Share to new investors in this offering by $0.004 per Common Share, assuming no change to the number of Common Shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

 

Because we are offering 2,729,755 Common Shares, if the underwriters do not exercise their over-allotment option, or 3,139,218 Common Shares, if the underwriters exercise their overallotment option, hereunder, if the assumed offering price of $10.99 decreases $0.50 to $10.49, the number of Common Shares offered by us will increase to approximately 2,859,867 (or 3,288,847 if the underwriter exercises its over-allotment option in full); if the assumed offering price of $10.99 increases $0.50 to $11.49, the number of Common Shares offered by us will decrease to approximately 2,610,966 (or 3,002,611 if the underwriter exercises its over-allotment option in full).

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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 service, 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 seven 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.

 

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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 complements 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’s total GMV was approximately $2.6 billion, an increase of approximately $0.7 billion or 36% when compared with GMV for the year ended December 31, 2019.

 

For the years ended December 31, 2018, 2019, and 2020, Newegg recorded net sales of $2.0 billion, $1.5 billion, and $2.1 billion, respectively. For the same periods, its total GMV was approximately $2.4 billion, $1.9 billion, and $2.6 billion, respectively. Newegg recorded net loss of $33.6 million, and $17.0 million for the years ended December 31, 2018 and 2019, and net income of $30.4 million   for the year ended December 31, 2020. For the same periods, its adjusted EBITDA was $(27.4) million, $(49.2) million, and $39.3 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” orders 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.

 

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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 its 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 Year Ended As of December 31,  
Key Operating Data:   2020       2019       2018    
Total visits(1)       382.2 million       262.8 million       261.6 million  
Number of customers(2)       37.3 million       34.4 million       32.7 million  
Number of active customers(3)       4.7 million       3.2 million       3.9 million  
Conversion rate(4)       2.4 %     2.4 %     3.2 %
Repeat purchase rate(5)       32.5 %     30.0 %     30.9 %
Average Order Value(6)       301       310       299  

 

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.

 

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(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 2018, 2019, and 2020, its Newegg Marketplace generated GMV of $472.1 million, $495.2 million, and $663.7 million, respectively, representing a CAGR of 12%, for the years 2018 to 2020, and accounted for approximately 19.6%, 25.6%, and 25.2%, respectively, of its total GMV. During the same periods, its Newegg Marketplace generated net sales of $43.2 million, $46.0 million, and $58.1 million, respectively, representing a CAGR of 10% for the years 2018 to 2020, and accounted for 2.2%, 3.0%, and 2.7%, 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.

 

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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 itself to be operating within one reportable segment.

 

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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 Year Ended December 31,  
    2020     2019     2018  
    (in millions, except for percentages)  
Net sales   Amount     %     Amount     %     Amount     %  
Direct sales revenues   $ 1,974.9       93.4     $ 1,476.7       96.3     $ 1,966.3       97.2  
Marketplace revenues     58.1       2.7       46.0       3.0       43.2       2.1  
Services revenues     81.9       3.9       11.2       0.7       12.9       0.7  
Total     2,114.9       100.0       1,533.9       100.0       2,022.4       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 Year Ended December 31,  
    2020     2019     2018  
    (in millions, except for percentages)  
Cost of sales   Amount     %     Amount     %     Amount     %  
Purchase price of goods sold by it directly   $ 1,678.3       91.2     $ 1,300.4       95.0     $ 1,739.5       95.8  
Costs related to Marketplace & service revenues     69.9       3.8       1.0       0.1       1.7       0.1  
Inbound and outbound freight costs     84.8       4.6       67.2       4.9       71.7       3.9  
Inventory write-downs & reserves     8.2       0.4       0.4       0.0       3.9       0.2  
Total   $ 1,841.2       100.0     $ 1,369.0       100.0     $ 1,816.8       100.0  

 

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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 Year Ended December 31,  
    2020     2019     2018  
    (in millions, except for percentages)  
Selling, general and administrative expenses   Amount     %     Amount     %     Amount     %  
Salary and other compensation costs   $ 107.1       42.8     $ 107.2       46.8     $ 103.5       41.9  
Payment and credit card processing fees     51.5       20.6       37.6       16.4       44.2       17.9  
Advertising and marketing     29.0       11.6       25.8       11.3       34.8       14.1  
Depreciation and amortization     9.1       3.6       10.7       4.7       10.2       4.1  
Others     53.5       21.4       47.9       20.8       54.5       22.0  
Total   $ 250.2       100.0     $ 229.2       100.0     $ 247.2       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—Related Party Transactions of Newegg” 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 $5.3 million, $4.2 million, and $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. For the year ended December 31, 2020, other income, net, primarily consisted of sales tax rebates and discounts, insurance proceeds, partnership 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.

 

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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 $9.6 million, $21.8 million, and $3.2 million respectively, in 2018, 2019 and 2020. 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 11%  as of December 31, 2020 and 8% as of 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 Year Ended December 31,  
    2020     2019     2018  
    (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   $ 2,114.9       100.0     $ 1,533.9       100.0     $ 2,022.4       100.0  
Cost of sales     1,841.2       87.1       1,369.0       89.3       1,816.8       89.8  
Gross profit     273.7       12.9       164.9       10.7       205.6       10.2  
Other operating Income/(expense)     -       -       28.3       1.8       (1.6 )     (0.1 )
Selling, general and administrative expenses(1)     250.2       11.8       229.2       14.9       247.2       12.2  
Gain (Loss) from operations     23.5       1.1       (36.0 )     (2.4 )     (43.1 )     (2.0 )
Interest income     1.1       0.1       0.6       0.0       1.5       0.1  
Interest expense     (0.7 )     (0.0 )     (2.9 )     (0.2 )     (1.6 )     (0.1 )
Other income, net     5.3       0.3       4.2       0.3       1.6       0.1  
Gain from sale of and equity income from equity method investments     3.2       0.2       21.8       1.4       9.6       0.5  
Gain (Loss) before provision for income taxes     32.4       1.5       (12.4 )     (0.8 )     (32.0 )     (1.6 )
Provision for income taxes     1.9       0.2       4.6       0.3       1.6       0.1  
Net income (loss)   $ 30.4       1.4     $ (17.0 )     (1.1 )   $ (33.6 )     (1.7 )
Less: Undistributed net income allocable to Series A and Series AA convertible Preferred Stock     (30.0 )     (1.4 )     -       -       -       -  
Less: Dividend or deemed dividend paid to Series A convertible Preferred Stock     -       -       -       -       (20.0 )     (1.0 )
Net income (loss) attributable to common stock   $ 0.4       0.0     $ (17.0 )     (1.1 )   $ (53.6 )     (2.6 )
Net earnings (loss) per share, basic   $ 0.49             $ (20.01 )         $ (80.68 )      
Net earnings (loss) per share, diluted     0.09               (20.01 )           (80.68 )      
Weighted average number of common stock outstanding used in computing per share amounts, basic     849,159               849,159             663,899        
Weighted average number of common stock outstanding used in computing per share amounts, diluted     4,561,604               849,159             663,899        

 

Note:  

 

(1) Includes share-based compensation expenses of $1.6 million, $0.7 million, and $3.9 million, respectively, in 2020, 2019, and 2018.

 

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

 

Net sales

 

Net sales increased by 37.9%   for the year end December 31, 2020 compared to the comparable prior year period from $1,533.9 million in 2019 to $2,114.9 million in 2020, which was mainly due to the increase in GMV from its direct sales platforms from $1,438.2 million in 2019 to $1,970.8 million in 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 year ended December 31, 2020, its cost of sales increased by 34.5% compared to the comparable prior year period from $1,369.1 million in 2019 to $1,841.2 million in 2020, generally reflective of the increase in its net sales. During the same period, its gross profit increased by 66.1% from $164.8 million in 2019 to $273.7 million in 2020.

 

Newegg’s profit margin increased from 10.7% in 2019 to 12.9% in 2020 primarily due to a strategy change where the company focused on selling high margin categories. There was also a high demand in sales that turned the inventories much faster. There were no aggressive promotions needed to move aged inventories that impacted the margin rate negatively.

 

Selling, general and administrative expenses

 

As of December 31, 2020, SG&A expenses increased from $229.2 million in 2019 to $250.2 million in 2020, which mainly resulted from (i) an increase in credit card charges from $37.6 million in 2019 to $51.5 million in 2020, which is directly related to the increase in net sales in 2020, and (ii) an increase in advertising and marketing expenses from $25.8 million in 2019 to $29.0 million in 2020.

 

Interest income and expense

 

For the year ended December 31, 2020, interest income increased from $0.6 million in 2019 to $1.1 million in 2020. This increase was primarily driven by an increase of $0.5 million in interest income on its loan to an affiliate.

 

Interest expense decreased from $2.9 million in 2019 to $0.7 million in 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 year ended December 31, 2020, Newegg recorded other income, net of 5.3 million, compared to other income, net of $4.2 million in 2019. For the year ended December 31, 2020, other income, net, primarily consisted of partnership incentives of $1.5 million, sales tax rebates and discounts of $1.4 million, and insurance proceeds of $0.8 million. 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.

 

Gain from sale of and equity income from equity method investments

 

For the year ended December 31, 2020, Newegg recorded a gain on equity method investment of $3.2 million on its investment in Mountain Capital. For the year ended December 31, 2019, Newegg recorded a gain on the sale of the 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 in 2019.

 

Provision for income taxes

 

Newegg’s provision for income taxes decreased from $4.6 million in 2019 to $1.9 million in 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.

 

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Net Income/(Loss)

 

For the year ended December 31, 2020, Newegg recorded a net income of $30.4 million in 2020, as compared to a net loss of $17.0 million for the same period in 2019. The increase in net income is primarily driven by a growth in its net sales and improvement in its gross margin.

 

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. Newegg concurrently leased back the property from the buyer under a lease agreement for ten years, resulting in right-of-use (“ROU”) lease asset of $14.1 million and a lease liability of $13.9 million as of the lease commencement date.

 

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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.

 

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 Year Ended December 31,  
    2020     2019     2018  
    (in millions)  
Net Sales   $ 2,114.9     $ 1,533.9     $ 2,022.4  
Adjustments:                        
GMV - Marketplace     663.7       495.2       472.1  
Marketplace Commission     (58.1 )     (46.0 )     (43.2 )
Deferred Revenue     16.2       (6.5 )     4.5  
Service Revenue     (81.8 )     (11.2 )     (13.0 )
Asia Net Sales     (0.0 )     (3.9 )     (21.7 )
Nutrend and Rosewill sales through third party platforms     (40.6 )     (31.1 )     (29.8 )
Other     20.3       2.9       11.6  
GMV   $ 2,634.5     $ 1,933.4     $ 2,403.0  

  

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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 Year Ended December 31,  
    2020     2019     2018  
    $     $     $  
    (in millions)  
Net income (loss)   $ 30.4     $ (17.0 )   $ (33.6 )
Adjustments:                        
Stock-based compensation expenses     1.6       0.7       3.9  
Interest (income) expense, net     (0.5 )     2.4       0.1  
Income tax provision     1.9       4.6       1.6  
Depreciation and amortization     9.1       10.7       10.2  
Gain from sale of and equity income from equity method investments     (3.2 )     (21.8 )     (9.6 )
Gain from sale of real estate property     -       (28.8 )     -  
Adjusted EBITDA   $ 39.3     $ (49.2 )   $ (27.4 )

 

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 $17.5 million and $9.2 million at December 31, 2020 and 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.

 

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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 years ended December 31, 2018 2019, and 2020.

 

    For the Year Ended December 31,  
    2020     2019     2018  
Summary Consolidated Cash Flow Data:   (in millions)  
Net cash provided by (used in) operating activities   $ 84.5     $ (10.1 )   $ (62.9 )
Net cash provided by (used in) investing activities     (5.2 )     84.7       (16.0 )
Net cash provided by (used in) financing activities     (1.7 )     (49.7 )     2.0  
Foreign currency effect on cash, cash equivalents and restricted cash     (0.3 )     (1.1 )     (0.8 )
Net increase (decrease) in cash and cash equivalents     77.2       23.8       (77.7 )
Cash, cash equivalents and restricted cash at beginning of the year     80.5       56.7       134.4  
Cash, cash equivalents and restricted cash at end of the year     157.7       80.5       56.7  

 

Operating activities

 

Net cash provided by operating activities was $84.5 million in 2020. The adjustments for non-cash expenses are primarily comprised of (i) $9.1 million of depreciation and amortization that was associated with property and equipment; (ii) $7.3 million of bad debt expense, and (iii) $4.2 million of provision for obsolete and excess inventory. The changes in operating assets and liabilities represented a $34.4   million increase in cash provided by (i) an increase in accounts payable of $76.2   million; (ii) an increase in accrued liabilities and other liabilities of $35.1  million; and (iii) an increase in deferred revenue of $21.8 million, partially offset by (i) a decrease in accounts receivable of $13.0 million; (ii) an increase in inventory of $76.2   million; and (iii) an increase in prepaid expenses and other assets of $9.6  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.

 

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Investing activities

 

Net cash used in investing activities was $5.2 million for the year ended December 31, 2020, which was primarily attributable to the payments made to acquire property and equipment of $6.2 million partially offset by the proceeds from insurance of $0.8 million and disposal of fixed assets of $0.1 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- Related Party Transactions of Newegg”

 

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— Related Party Transactions of Newegg”

 

Financing activities

 

Net cash used in financing activities was $1.7 million in 2020, due to the repayment of its line of credit.

 

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.

 

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 $8.0 million, $10.3 million, and $6.2 million in 2018, 2019, and 2020, respectively. Newegg intends to fund its future capital expenditures with its existing cash balance and proceeds from this Offering.

 

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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 December 31, 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   $ 2,369     $ 281     $ 577     $ 599     $ 912  
Operating Leases     48,738       10,258       15,139       8,863       14,478  
Total contractual obligations   $ 51,107     $ 10,539     $ 15,716     $ 9,462     $ 15,390  

 

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.

 

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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 December 31, 2020 and 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, 2018, 2019, and 2020, Newegg recorded foreign exchange loss of $1.6 million, loss of $0.5 million, and loss of $0.7 million, respectively. Based on the balance of its foreign-denominated cash and cash equivalents, as of December 31, 2018, 2019, and 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.

 

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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 year ended December 31, 2020 decreased to 93.4%  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.

 

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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 Newegg also provides the payment processing function. Newegg recognizes revenue upon the 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 Newegg 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, 2018, 2019, and 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 returns, rush processing and dedicated customers service. 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 years ended December 31, 2020, 2019, and 2018 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.

 

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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 Program, 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 Program.

 

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.

 

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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.

 

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OUR BUSINESS

 

Pursuant to the Merger Agreement and the Disposition Agreement, upon consummation of the Restructure, LLIT will dispose of 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.

 

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At the nexus of this e-commerce ecosystem, Newegg takes stewardship in continuously growing it and delivering compelling value propositions to its participants over the long run. On the 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:

 

  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.

 

  Easy and enjoyable shopping experience.

 

  o 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.

  

  o 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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  o 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.

 

  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, where like-minded tech enthusiasts can get information about Newegg and tech products.

 

  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 reduce infrastructure costs associated with brick-and-mortar retailers. Newegg is also able to find optimized pricing points by leveraging its data and analytics capabilities and by monitoring its major competitors’ pricing trends.

 

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 Delivers Its 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 value:

 

  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.

 

  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.

 

  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 has 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:

 

  Access to a targeted customer base. Enabling brands to cost-effectively reach target audiences, Newegg’s 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.

 

  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 service;

 

  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.”

 

  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.

 

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 its 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.

 

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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.

 

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 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 businesses. 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.

 

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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 Logistics, Newegg Staffing, Pure Facility Solutions, Inc., Newegg Bridge, a PC Builder tool, and a Newegg personal computer assembly service.

 

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.

 

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The following chart sets forth Newegg’s business models:

 

 

B2C

 

Newegg’s B2C business model features selling products directly to consumers. Newegg has maintained 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 GMV of $2.3 billion and $1.5 billion for the year ended December 31, 2020 and 2019, respectively.

 

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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 GMV of $349.9 million and $409.8 million for the year ended December 31, 2020 and 2019, respectively.

 

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.”

 

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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:

 

  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.

 

  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.

 

  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.

 

  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.

 

  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.

 

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 from 8% to 15% according to product category. 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   Products   Selected Featured Brands   SKUs as of
December 31,
2020
Computer System   Desktops, laptops, gaming laptops, peripherals and accessories    Asus, MSI, HP, Lenovo, Dell, Acer, Microsoft, Samsung, LG, Gigabyte, Westinghouse   Approx. 6.7 million
Components   CPU / processors, Graphic Cards, Motherboards, storage devices and computer accessories    Intel, AMD, Asus, MSI, Corsair, Gigabyte, ASRock, EVGA, Western Digital, Seagate, Samsung, G.Skill   Approx. 2.5 million
Electronics   Home Video, Home Audio, Headphones, Pro Audio/Video, Cellphones, Wearables, Digital Cameras    Samsung, LG, Sony, Denon, Yamaha, Beyerdynamic   Approx. 10.3 million
Gaming   Xbox, PlayStation, legacy gaming, gaming titles    Nintendo, Sony Playstation, Microsoft Xbox    Approx. 0.2 million

 

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Networking & Smart Home   Home networking, commercial networking, server & components and smart home products    Asus, TP-Link, Netgear, Linksys, SonicWall, Polycom, Plantronics, Jabra, Yealink, Cisco, Ruckus, Ubiquiti   Approx. 2.8 million
Office Solutions   Display & printing, office technology furniture, office supplies and mailing & inventory supplies    HP, Brother, Epson, Xerox, Lexmark, Zebra, Honeywell, ELO Touch, Sony, Sharp, Asus, Acer, Samsung, Eureka Ergonomic, COUGAR   Approx. 2.5 million
Software & Services   Software, Digital Downloads, Warranty & Services, 3rd Party Gift Cards, and Entertainment Products    Microsoft, Adobe, Norton, Intuit, SquareTrade   Approx. 0.1 million
Automotive & Industrial   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. 1.4 million
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. 7.3 million
Health & Sports   Fitness, sports and health and beauty supplies   Huffy, Vilano, Razor, Garmin, Barska, Tactical Scorpion Gear, Intex, GoPowerBike, Callaway Golf, BestMassage    Approx. 1.3 million
Apparel & Accessories   Clothing, Costumes, Maternity, Shoes, Socks, Men & Women Clothing    Adidas, Converse, Levis, Skechers, Timberland, UGG, Under Armour, Crocs, DC Shoes   Approx. 2.7 million
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   Approx. 2.4 million

 

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.

 

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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 of Newegg that was re-launched in 2014 after its initial gaming machine line had been phased out previously, offering 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

 

  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.

 

  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 charges 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, Indiana, New Jersey and Texas.

 

  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.

 

  Pure Facility Solutions: Newegg launched a cleaning service business named Pure Facility Solutions in 2020 offering commercial facilities cleaning and sanitizing services to businesses.

 

  Newegg PC Assembly Service: Newegg has launched a PC building service which offers 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).

 

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

 

  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.

 

  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 1.5 million customers as of December 31, 2020, and GMV of $181.1 million for the year ended December 31, 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 0.8 million registered customers outside North America as of December 31, 2020, and had a GMV of $63.9 million for the year ended December 31, 2020.

 

  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 May 3, 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.”

 

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:

 

  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.

 

  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.

 

Its logistics and fulfillment focus on reliable, efficient and flexible delivery.

 

  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.

 

  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.

 

  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.

 

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.

 

  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 Texas, and has customer service representatives working remotely in California, Indiana, Nevada, New Jersey and Texas, 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.”

 

  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 Newegg and may be eligible for reimbursement of the purchase price of any product they purchase from a Newegg Marketplace seller, up to $1,000.

 

  Return policy. Newegg’s standard return policy generally 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.

 

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.

 

  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 increased sales. In addition, Newegg allows customers to use Bitcoin and Bitcoin cash to pay for purchases made on its platforms.

 

  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 offers 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.

 

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 can 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.

 

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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.

 

  Paid search engine marketing. Search engine marketing is a major driver of its traffic and customer acquisition. For the year ended December 31, 2020, its spending on paid search engine marketing represented approximately 59% 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.

 

  Affiliate Marketing. Newegg also engages in affiliate marketing programs where Newegg offers 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 20% of Newegg’s total marketing expense for the year ended December 31, 2020.

 

  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. Based on customers’ onsite behavioral data and purchase history data, Newegg is able to identify prospect customers (that is, 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.

 

  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.

 

Offline Marketing

 

Newegg also devotes marketing resources to various offline formats, including displaying offline advertisement through multiple channels and sponsoring or organizing offline events.

 

  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 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.

 

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.

 

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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

 

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.

 

  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.

 

  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.

 

  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. 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.

 

  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.

 

  Anti-fraud monitoring. Online fraud is a constant threat to the security and reliability of e-commerce retailers. Newegg works 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.